ADIT, NEW DELHI vs. CINCOM SYSTEMS INC., NEW DELHI

raised in ITA No. ITA No. 952/Del/2006 i.e. the assessee’s appeal, are as follows: i. On the facts and circumstances of the case, the order passed by the learned CIT(A) is bad both in the eye of law and on facts. ii. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in holding that communication charges of Rs. 36,03,936/- chargeable to tax in India. iii. On the facts and circumstances of the case, the learned CIT(A) has erred in holding that the services provided by the appellant falls in the definition of royalty under Income Tax Act as well as DTAA and hence liable to be taxed in India. iv. On the facts and circumstances of the case, the learned CIT(A) design or model, plan, secret formula or process & was taxable in India under Article 12(3)(a) of the Income Tax Act. v. On the facts and circumstances of the case, the learned CIT(A) has erred in relying upon the Ruling delivered by Authority for Advance Ruling in P. No. 30 of 1999, 238 ITR 296, as the same is clearly distinguishable from the case of the appellant on facts and ignoring the judgments cited by the appellant which are applicable to the facts of his case. vi. That the appellant craves leave to add, amend or alter any of the grounds of appeal.

We heard the rival submission and perused the material on record. From the perusal of the agreement entered by the assessee company with Cincom Systems (India) Pvt. Ltd., it is clear that the assessee provided the access to its internet by which it provides a gateway that will facilitate call centers to incoming and outgoing calls from India to the people of USA, referred as Cincom Gateway. In other words, the assessee company merely provided facility for a consideration. Then the question that comes up is whether the consideration paid for the use of such facility is in the nature of royalty as defined under the DTA between India and USA. Undisputedly, the impugned payment falls within the definition of ‘royalty’ as defined under the provisions of 9(1)(vi) of the Act. However, since the assessee company is a resident of United States of America, it is entitled to be governed by the provisions of DTAA between India and USA, the term ‘royalty’ was defined in the Article 12(3) of the DTAA as under: “3. The term ‘royalty’s as defined in this Article means: (a) Payments of any kind received as a consideration for the use of, or the right to use, any copyright or a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, 6 any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and’ (b) Payment of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport from activities described in paragraph 2(c) or 3 of Article 8.”

Now, we are required whether the nature of services provided by the assessee company falls within the definition of ‘royalty’ as defined above. In the present case, it is a case of use of embedded secret software owned by the assessee company for the purpose of enabling the customer from India to call the residents of USA or vice-versa. A case involving almost identical facts had come up before the Hon’ble Authority for Advanced Ruling, reported at 238 ITR 296, In this case, company incorporated in the USA belonged to a group of companies engaged in worldwide credit card and travel business. It was engaged in providing international credit cards, traveller’s cheques and other travel related services. These instruments are used, discounted and encashed all over the world by travelers on tour or business. To keep track of the expenses incurred on traveller’s credit card or purchase and encashment of traveller’s cheques, etc., the USA company maintained a centralized computer in USA. The centralized computer or Central Processing Unit (CPU) was a huge high technology computer complex having 15 to 20 main frame IBM computers and other related hardware and software facilities involving substantial investment and capable of very high volume storage and high speed processing of data. The 7 above CPU was accessed and used by various group entities located worldwide through a consolidated data network maintained in Hong Kong. The transactions done by a traveler in a particular country were reported to a centralized computer in that particular country. In India, the centralized computer was maintained by an Indian company located at Delhi. This company received information on compute through telephonic or microwave links about the use of credit cards and travellers’ cheques by travelers all over the country. It also serviced thirteen group companies in Asia and the Pacific in a similar manner. The information was then passed on to the Hong Kong computer centre of the American company. For carrying out this operation, the Indian Company obtained leased lines from VSNL. The American company charged the Indian Company for the use of its computers in Hong Kong and USA. The Indian company was a subsidiary of the American Company. The issue which was placed before the AAR, was whether the payment due to the American company from the Indian company was liable to tax in India and if so whether it was covered under article 12(3)(a) or 12(3)(b) of the DTA between India and the USA. The AAR ruled that the definition of the expression “royalty” under section 9(1)(vi) of the Act read with clause (vi) of the explanation includes rendering of any services in connection with any activities for the use of any patent, invention, secret formula or process, etc. In the instant case, the concept of “source” against “residence” becomes more significant as the issue relates to cyberspace activities. The transmission of information is through encryption as 8 the data relates to clients and strict confidentiality is observed. It is for the downloading of the software that the royalty is paid. In this context, the source rule becomes relevant which requires that royalty is sourced in the State of the payer. According to the agreement between the American Company and the Indian company, the facilities are to be accessed only by the Indian company. The consideration payable is for the specific programme through which the Indian company is able to cater to the needs of the group companies located in Japan and other places. The transaction would be related to a “scientific work” and would partake of the character of intellectual property. The payments received in such transactions are for the use of intellectual property and partake of the character of royalty. The software is customized and secret. From the facilities provided by the American company to the Indian company, which are of the nature of online, analytical data procession, it would be clear that the payment is received as “consideration for the use of, or the right to use design or model, plan, secret formula or process”. The use by the Indian company of the CPU and the consolidated date network of the American company is not merely “use of or the right to use any industrial, commercial or scientific equipment” as envisaged in article 12(3)(b) of the DTA but more than that. It is the use of embedded secret software (an encryption product) developed by the American company for the purpose of processing raw data transmitted by the Indian company, which would also clearly fall within the ambit of article 12(3)(a) of the DTA between India and the USA.

The reliance placed by the learned counsel on the decision of Hon’ble Delhi High Court in the case of Asia Satellite Telecommunication Co. Ltd. Vs. DIT [2011] 332 ITR 340 is totally misplaced. In this case, use of Transponder is involved which is not a self contained operating unit. It is in orbit with footprints all over the world so that its location cannot be attributed with reference to location of its customers. In our considered opinion, the ratio of the ruling of Authority for Advanced Ruling, reported in 238 ITR 296 is squarely applicable and the consideration paid is in the nature of royalty within the meaning article 12(3) of DTA between India and USA.